Colorado lawmakers who have already balanced a budget shortfall of $1.4 billion now must come up with an additional $384 million in cuts, marking this as the worst downturn for state government since at least the Great Depression.

Worse than earlier this decade, when the state was forced to cut $1 billion and made national news after lawmakers decided to end Medicaid benefits for legal immigrants, including Russians who had survived World War II.

Worse than in the 1980s, when a crisis in the oil industry, real estate and savings-and-loan institutions created economic havoc.

Even in a state used to cycles of boom and bust, the current malaise is unprecedented.

“Here we are again, but this is just so much worse,” said Todd Saliman, a former Joint Budget Committee member and the budget director for Democratic Gov. Bill Ritter.

“Colorado has always had a boom-and-bust cycle, but this bust is not because of anything particular about Colorado. It’s a national occurrence,” Saliman said.

Furloughs, layoffs and reduced services are the talk of every state as politicians scramble to deal with a fast and furious financial crisis that seemed to sneak in last fall without warning.

An analysis from the National Conference of State Legislatures puts states’ collective shortfall at more than $121 billion.

TABOR may act as cushion

But examining Colorado through the national lens provides some silver linings.

Of the 45 states and Puerto Rico reporting, Colorado’s shortfall is the 18th smallest, with an estimated 2010 deficit that equaled 12 percent of the state’s general fund budget before the most recent economic analysis. The states in the worst shape are seeing shortfalls that have eaten up more than a quarter of their budgets, including Western neighbors Arizona and Nevada.

Colorado is not California and is not in any danger of becoming California with its $24.8 billion budget gap, in part because of a different budget structure.

The fact that “we are obligated to balance the budget each year has actually protected Colorado,” Saliman said.

He never mentioned TABOR by name, but Saliman also credited “constitutional budget provisions that rein in spending.” The 1992 Taypayer’s Bill of Rights, or TABOR amendment, controls taxation and spending.

And Colorado is predicted to be one of the first states to rebound, in part because of industry investments, according to a recent report from Moody’s bond-rating agency.

Former Sen. Dave Owen, who led the Joint Budget Committee during the 2002-03 budget crisis, grew up during the Depression and said the current crisis could never be as rough as those times. There were no unemployment checks, no mortgage or utility assistance programs.

“But this could end up being the worst budget crisis since then,” the Greeley Republican said, then paused. “I hope there’s nothing worse than this.”

Unknowingly headed to cliff

Colorado’s history has been linked with boom and bust since gold first lured prospectors to Pikes Peak in 1859. Given that, residents may be asking themselves how the state finds itself in cutting mode, again.

The economy was on an upswing when Bill Ritter became governor in 2007. Republican and Democratic lawmakers talked about creating a rainy-day fund or increasing reserves, but their bills died.

The next year, the legislature passed a bill creating a higher education reserve fund on the grounds that if there were any kind of downturn, it would help protect colleges.

Republicans argued it wasn’t enough and suggested reducing the budget because of fears of a shaky economy. That didn’t happen.

Sales-tax collections began falling, slowly at first, around June 2008. About the same time, gas prices inched upward, and 401(k) holdings slipped downward.

Aside from being one of three major sources of state revenue, sales taxes are also an early indicator of consumer confidence and the strength of the tourism industry, said Patty Silverstein, chief economist with Littleton-based Development Research Partners.

Even so, most believed the dip in sales taxes and other indicators signaled a normal, cyclical downturn.

“It almost seemed to be more general business cycle activity as opposed to the whole collapse of financial markets,” Silverstein said. “Even those folks who were watching that market so closely were surprised.”

Tax revenue continued to outperform the previous year’s until November 2008.

By then, the subprime mortgage market had collapsed, and high-profile companies from AIG to Lehman Brothers were in trouble.

The December 2008 forecast was brutal, a $604 million shortfall that had Republicans saying, “I told you so.” Ritter directed his department heads to make cuts. Lawmakers raided the $33 million in the higher education reserve fund long before they thought they would have to.

There was some optimism revenues might stabilize this year, but during the first three months, corporate and personal income-tax revenues came in nearly $600 million short of the previous year, according to data from the state Department of Revenue.

Sales-tax revenue has dropped by as much as 18 percent in some months. By May, the state had collected $200 million less than the prior year.

Colorado’s latest revenue figures, released last week, provided more dire news. With revenues again coming up short of predictions, the governor announced the state would have to take $249 million set aside for next year’s budget to pay a shortfall in this year’s budget, which ends Tuesday.

The next cuts will be harder

And when state lawmakers hone their knives and begin filleting next fiscal year’s budget to the tune of $384 million, they must do so with few obvious places to find the money.

“There’s no place to cut a whole leg off,” said Rep. Don Marostica, R-Loveland. “You can cut some toes off and maybe a foot. But there’s no place to cut a whole leg off.”

As a result, lawmakers and other budget hawks say the legislature will likely take a hodgepodge approach, using familiar deficit-slashing tactics while also considering more unique measures.

Sen. Moe Keller, D-Wheat Ridge, who leads the Joint Budget Committee, said lawmakers can still draw a small amount from reserves and have a little bit of leftover federal stimulus money. The state may also look at whether there are any other special funds with money still left in them to take.

But those moves will only get lawmakers a fraction of a way to their goal.

To make up a bigger chunk, lawmakers will have to slash money from state agencies. Gov. Ritter has already asked department heads to come up with recommendations for cutting 10 percent out of their budgets, and he has said layoffs are not out of the question.

Herein lies the conundrum.

Roughly 90 percent of the state’s $7.5 billion general fund budget — the money that pays the state’s operating expenses — is tied up in five areas: K-12 education, health care, prisons, human services and higher education. Almost all of those have legal or practical protections that keep them from being cut this time.

Cut K-12 education too deeply and the state could run afoul of Amendment 23, the measure that requires education spending to rise each year. Cut health care or higher education and the state risks losing certain federal dollars too. Close prisons and conditions become more dangerous in the ones that are left.

Some lawmakers do see wiggle room.

The legislature is expected to reduce by $110 million the increased spending planned for the K-12 education budget. But Sen. Keith King, R-Colorado Springs, said about $40 million more could be cut from K-12, and he wants to do it now in a special session.

“The legislature should step up to the plate and say, ‘We are going to solve this issue, and we’re going to solve it at the beginning of the fiscal year,’ ” King said.

King’s plan for deeper K-12 cuts, though, doesn’t sit well with Sen. Chris Romer, D-Denver, who said he hopes the legislature won’t cut a dime from education. Instead, he thinks the legislature should make up a large part of the shortfall by suspending certain tax credits.

“We have $3 billion in sales-tax and business-tax loopholes, all of which are well-liked by their special interest groups,” Romer said. “I think we need to look at all of them.”

Carol Hedges of the left-leaning Colorado Fiscal Policy Institute applauded Romer’s idea. She said Colorado ranks 47th in overall state spending and should focus on bringing in new money — and money it is owed in back taxes — rather than further budget-cutting.

“The problem is the state of Colorado just doesn’t collect enough revenue,” she said.

Keller said the legislature will probably look at other ideas — such as suspending the state’s conservation easement program or revising regulations for the state’s enterprise zones — to help fill the budget hole.

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